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Dissolving a Short Term Partnership Fairly

Hello! I'm new here, facing a challenging situation. I own a small retail
vintage decor and furniture business. I have never had a business before and
have worked, as I'm sure most of you have, endless hours to build this,
investing virtually all of my money and putting just about every dime back
into the business. I have put $25,000 into inventory that is worth, retail,
about $100,000, over the course of the past two years.
I was in a very small shop (about 300 square feet) for about a year. Five
months ago I moved to an 1100 square foot former muffler shop in a great
location. It took a lot of renovation, but it is a fantastic space with a lot
of personality. The building is attached to a smaller, more typical
storefront which was on the market as a separate rental when I rented this
place. Revenue has consistently grown every month since moving here.
Shortly after moving in I was approached by a very nice neighbor proposing a
partnership. She was tired of being "just a housewife" and was looking for
something to do outside the home.
Our deal was this: she would put $400 a month toward the business. In
addition, she would work 20 hours a week. My thought was that, since I
couldn't afford to hire an employee, I was losing out on revenue online by
not having time to list all my merchandise, and her contribution of time
would definitely end up increasing the revenue enough to pay for her share,
which was to be 35% after a set amount that covered basic operating expenses
like rent and electricity. The time she would put in would be frankly more
significant than the $400. The catch was we could have nothing on paper,
because she's on disability, so our entire agreement was verbal.
At first, she did her 20 hours, but very inconsistently. It didn't result in
the predicted income increase, at least not right away. But to be honest, I
liked having a partner. I'd been working so hard for so long, just having
someone else to share the burden - even if they were only sharing a tiny
corner of it - felt good. So I was willing to keep trying.
When I moved into the current shop, I had it in mind that I would eventually
rent the attached 700 square foot storefront as well. This would allow me to
have much more visibility, as the current shop can be seen by people headed
east on our busy street but is virtually invisible to those heading west. The
landlord had priced it very high, however, and wasn't really budging on
price. Plus I was tapped out from the initial move. I decided to wait until
January - when he would have had an unoccupied building for a year and I
would have recovered from the outpouring of money from the move - to make my
proposal again, assuming he would be more amenable at that point. What he was
asking was more than double the local going rate. I was reasonably certain no
one was going to rent it at that price, and was willing to take my chances
that it would still be available when I was ready to rent, and that he would
be likely to accept my offer at that time.
My new partner felt that this storefront was crucial to the success of the
store, and she was worried it would be rented by someone else. She offered to
pay the first month's rent if I would take the place right away. I hemmed and
hawed for a while, worried that I was perhaps growing too quickly, but then I
did it. I made the offer to my landlord, and he accepted, at a rate slightly
higher than I wanted, but still in the range. Only my signature went on the
two year lease because, again, she wanted our deal to remain under the radar.
Part of the deal here, of course, was that my partner and I would split up
the major expenses of expanding the store - signage, construction, etc. I was
concerned because, though I could afford all the improvements over time,
these expenses were all going to hit at once. It was clear from the start
that she was far more liquid than I, and I understood from our many
conversations leading up to signing that lease that she was willing to float
a portion of my share should any unexpected costs arise, to be paid back at
an unspecified date. I felt this was a fair arrangement, as she was
consistently recouping her $400 a month investment every month from her share
of sales of the approximately $25,000 worth of merchandise I already owned
before she came along. She seemed to feel it was fair, too.
Well, the first time something unexpected came along she did cover the cost.
Then she became freaked out about the money because she would have to explain
to her husband where it had gone, and asked me to pay back my share about a
week later. I was able to, but it was very different than what we'd agreed to
verbally. The next time something came up - unforeseen costs on our signage -
I didn't want to go forward, wanted to come up with a different plan, since I
didn't have the money. She put in the money with a smile on her face,
reassuring me that we were in this together. Two weeks later, she freaked out
again and demanded that I repay her immediately, claiming she had never
intended to cover my portion for more than a few days.
At that point, I told her I couldn't handle the back-and-forth, and she told
me that the whole thing was stressing her out. We agreed to dissolve our
partnership.
That leads me to two questions.
1) I'm pretty sure I was selling myself short by even entering into this, but
I don't know what it SHOULD have cost for someone to buy into an existing
business with $25,000 in inventory and an established income of about $4000 a
month (not a lot, I know, but growing consistently). How would I have
determined a figure for this if I'd been thinking more clearly instead of
grabbing at the first person who offered to help? If this ever comes up
again, what should I be asking of someone who wants to buy in to my business?
2) Do I now owe her back all of her unrecouped investment? That includes the
money she put up for the first month's rent, and her portion of expenses
related to opening the new building? I know I owe her my share of these
costs; I had always expected to pay that back. But do I owe her for the
things she agreed to pay for, like her half of the sign that's already been
paid out? I think I probably do, because she will never reap any benefit from
that sign, and because even though it was her sharing the cost that made me
willing to do it, I am the majority owner (the only owner on paper) and
ultimately responsible. But I have a friend whose opinion I respect telling
me that I only owe her for my share - the loan part - and that she should
consider the rest a loss.
3) If I DO owe her this money, is it realistic to expect that I would make
monthly payments to her until it is repaid, basically converting her
investment to a loan? Or is she entitled to come in and take merchandise out
of my store equal to the amount of money she has put in (this is what she
wants to do right now)?
I really want to do the right thing here, but I don't want to screw myself in
the process. I am now saddled with many expenses, including a second rent,
that I had planned to take on later, not at the start of what is a
notoriously slow period for the vintage business (Christmas is slow for used
goods, since most people only give new for the holiday). I have signed
contracts taking responsibility for things I would not have agreed to without
knowing someone else was picking up part of the tab. And I feel as if my
business has been so disrupted by all this.
I know I am an idiot for entering into all this without a written agreement.
Feel free to remind me - I deserve it. Thanks for any insight you can give.

BizResearcher | Window Shopper |
11/16/2013 - 11:01 am

As you state, you should have had a legal partnership agreement that covered
issues like who makes financial decisions. When someone wants to do something
that they know they shouldn't be doing, that sends up huge red flags. If a
person is willing to deceive a state or federal agency, then why not deceive
you too?

You really need to talk to an attorney and find out your responsibilities in
your state. That should give notice to your "partner" that all future
dealings will be handled in a legal manner. And never do something like this
without a legal partnership agreement. You are fortunate that the person
didn't co-sign anything.